SETTING THE RIGHT PRICE
II. Water pricing in an evolving institutional framework:
recent trends within different national contexts
The Italian Case:
a new entity for water pricing
Bruxelles, 4th December 2014
The “new entity” in the
“national context”
AUTORITA’: CLASSICAL FUNCTIONS
•
Regulatory functions

Setting tariffs for protected markets and for the use of monopoly infrastructures

Setting conditions for third party access to the network

Setting compulsory standards for quality of service by incentives, penalties, refunds

Setting rules for separation of vertically integrated companies

Setting conditions for service supply and contracts
•
Monitoring functions (compliance of regulation, wholesale markets, liberalisation process)
•
Enforcement functions (consumer protection, infringement procedures, dispute
settlement)
•
Advising functions (opinions to Government and Parliament on market structure and
promotion of competition)
•
•
•
Law 481 of 14 November 1995 establishing AEEG as an independent regulator
sets the powers for electricity and gas sectors
Law Decree 201 of 6 December 2011 extended AEEG powers also to water sector
Law Decree 145 of December 2013 extended the name, in AEEGSI
3
MULTI-LEVEL GOVERNANCE IN THE ITALIAN
WATER SECTOR
NATIONAL LEVEL
Ministry of Environment and
the Protection of Land and
Sea [MATTM]
With the law December 2011, n. 214, AEEGSI has
competences also in regulating, controlling and
monitoring water services. Main functions:
- Design of rules for pricing
- Tariff approval
- Definition of quality levels
- Control over the AMDP
- Consumer protection
Italian Regulatory Authority for
Electricity Gas and Water
[AEEGSI]
SOVRA-REGIONAL LEVEL
Basin Authorities
REGIONAL LEVEL
Regions
Arpa
INTER-MUNICIPALITIES LEVEL
ATO [69]
LOCAL LEVEL
Municipalities
Land Reclamation
Authority
4
REGULATORY PROCESS
PHASE 1
AEEGSI
defines tariff rules
PHASE 2
Local Authorities
approve the tariff proposal, composed of investment plan
and related financial plan
PHASE 3
AEEGSI
collects all the proposal and all the other relevant data
PHASE 4
AEEGSI
investigates and verifies one-by-one the collected proposals,
asking for further information or elements, if necessary
PHASE 5
AEEGSI
apporves – with or without modification or prescription, the
proposal
PHASE 6
AEEGSI
carries out an enforcement activity
5
“Recent trends” in “water pricing”:
the Italian Case
Cost-Reimbursement Rules
CHRONOLOGY OF THE TARIFF COMPUTATION RULES
Law Decree n.
201: elimination of
former National
Agency and same
functions given to
AEEGSI
21 July 2011
WATER TARIFF METHOD (MTI)
FIRST REGULATORY PERIOD 2012-2015
From 2012
From 2014
To the end of 2015
6 December 2011
- MTN (Normalized Tariff
Method) [Ministerial
Decree 1 August 1996]
- Emilia-Romagna Tariff
Method [Regional
Decree no 49, 13 March
2006]
- CIPE Tariff Method
Previous method as
modified by AEEG
Del. 273/2013/R/idr
Capping revenues according to ex-ante «K regulation»
- MTT – Transitory Tariff
Method [AEEG Del.
585/2012/R/idr]
- MTC - Tariff Method
for ex-CIPE [AEEG Del.
88/2013/R/idr]
- completing measures
[AEEG Del.
459/2013/R/idr]
Regulatory Schemes
& completing
measures
[AEEGSI Del.
643/2013/R/idr]
Capping revenues according to ex post « regulation»
7
AEEGSI’s building block regulatory process
…?
CONVERGENCE
TRANSPARENCY
EFFICIENCY
EFFICACY &
EFFICIENCY
COHERENCY
COHERENCY
COHERENCY
TRANSPARENCY
TRANSPARENCY
TRANSPARENCY
2013
2012
-
Transparency
Phase
Approval of a first
transitional tariff
method (2012-2013)
starting to
homogenize national
peculiarities
Coherency Phase
Process of tariffs
approval in order to
‘unblock’ stagnant
situations. Given the
priorities decided at
local level,AEEGSI
provided for a
regulatory framework
based on coherency
among priorities and
instruments
MULTIFACETED
SUSTAINABILITY,
CONSIDERING
AFFORDABILIY AND WTP
ELEMENTS, TOGETHER
WITH QUALITY OF
SERVICES, OF
ENVIRONMENT,
2016
2014
-
EFFICACY &
EFFICIENCY
-
Efficacy &
Efficiency Phase
Approval of a new
tariff method (20142015) introducing first
elements of
investment incentives
and operating costs
efficiency process
-
Convergence
Phase
Promoting
investments to reach
convergence among
different areas and to
established quality
standards.
8
TARIFF METHODS: CHANGES IN REGULATION
 From three tariff methods (MTN, CIPE and Emilia Romagna methods)
…..to one single water tariff method
Tariff computation rule on the basis of the so called
Metodo Normalizzato (MTN):
C  A R
Tn  
n
 VE 
Tn
 1  K n 
Tn1
Capping revenues according to ex-ante «K regulation»
(with all variables at constant value)
 Today investments repaid ex post: no more negotiated tariffs (between
local governments/administration and operators)
 Tariff determination:
MTT specifics that tariffs applied in 2012 (calculated on the base of the
old Method) - and held constant in 2013 - have to be updated multiplying
them by a factor .
For each year a=[2012; 2013], we have:


VRG a


VRG a  %b * Cb
a
  max
;
2012
2011 T
2012
2011 T
a
a
a 
  tarif u  (vscalu )  (1  %b ) * Rb  tarif u  (vscalu )  Rb 
u
 u

Capping revenues according to ex post «
regulation», introduced by MTT and
confirmed by MTI
9
DEFINITION OF THE COST COMPONENTS IN MTI (2014-2015)
a
VRG a  Capexa  FoNI a  Opexa  ERCa  RCTOT
[1]
[2]
[3]
[4]
[5]
[1] IMMOBILIZATION COSTS
Capexa  AMM a  OF a  OFisca  CUIT a
[2] COMPONENT IN SUPPORT OF SPECIFIC OBJECTIVES
a
a
a
FoNI a  FNI FoNI
 AMMFoNI
 CUITFoNI
[3] OPERATING COSTS
a
Opexa  Opexend
 Opexala
[4] COMPONENT TO COVER ENVIRONMENTAL AND RESOURCE COSTS
ERCa  EnvCa  Re sC a
[5] COMPONENT TO BALANCE THE REVENUES LIMIT FOR THE OPERATOR IN THE PREVIOUS YEARS
a
TOT
Rc

 Rc
a
VOL
 Rc
a
EE
 Rc  Rimb  Rc
a
ws
a
335
*  1  I 
a
a
ALTRO
t
t  a 1
10
COST COMPONENTS … Capex
[1] IMMOBILIZATION COSTS
Capexa  AMM a  OF a  OFisca  CUIT a
AMM ais the cost component representing depreciation:
 IPc ,t * dflta

AMM    min
; IMN ca,t  


c
t
 VU c

2011
a
a

 IPc ,t  CFPc ,t 
a
 max0;   min
* dflta ; IMN ca,t  CFPca,t * dflta  FACFP
VU
 c t  2012
c




a
OF a and OFisc are Financial & Fiscal costs:
 CIN
OF a  K m    * 1 
 CIN a

a
fp

 * CIN a


 
1
CS / CnS 

 K d * (1  tc ) *
1   BTP10 *
(
1

CS
/
CnS
)
(
1

CS / CnS) 


Km 
1
(1  rpi)

 * ERP
1  rpi
*
1
(1  CS / CnS)
OFisca  t c * Raia
 

 
FOLLOWED CRITERIA
• Useful lives,
• Monetary revaluation of
assets,
• A first definition of
terminal value
FOLLOWED CRITERIA
• Monetary revaluation of
assets
• Standardized Financial
& Fiscal Costs
• Standardized D/E ratio
OF and OFisc are calculated on the Net Invested Capital,
evaluated ex post, according to the “historical cost” principle
CIN a  IMN a  CCN a  LICa  FAcc FoNInon _ inv
EFFECTS
•
•
Reduction of the cash flow in the
short term, to be compensated
with terminal value;
Long term growth of Base Rate
EFFECTS
•
•
Ceiling on the bilateral
bargaining process between the
service provider and the
financial institution, to reduce
financial costs
It is not ensured the effective
return on investment, rather
taking into account a standard
ratio between debt and equity
(CS/CnS=1)
CUIT a is the cost component defined in excess of the allowed cost for the use existing public
infrastructure
11
COST COMPONENTS … FONI
[2] COMPONENT IN SUPPORT OF SPECIFIC OBJECTIVES
a
a
a
FoNI a  FNI FoNI
 AMMFoNI
 CUITFoNI
FNI FoNI
a
is the cost component for financing new investments, determined by the competent local
Authority within the limit of the component:


FNI new,a  max 0; * IPt exp  Capexa

where ψ =(0.4-0.6) is the parameter that quantifies the need for additional funding, in order to
achieve the planned investments, compared to reimbursment immobilization costs.
This component will be present only in the Schemes III and IV, where the need for investments is
very high
AMMFoNI
a
is the cost component representing depreciation of non-repayable public transfers
a
CUITFoNI is the cost component defined in excess of the allowed cost for the use existing public
infrastructure
12
COST COMPONENTS … Opex
[3] OPERATING COSTS
a
Opexa  Opexend
 Opexala
a
are the endogenous costs:
Opexend
a
Opexend

a
(Op 2013  COeff 2013 )
*  1 I t
2
t  2014


if there is no variation of the objectives or activities of the operators
(SCHEMES I and III)
FOLLOWED CRITERIA
• Rolling Cap
mechanism, that allows
the firm to partially earn
the gains coming from
cost reductions
a
Opexend
 Opnew,a
if there is variation of the objectives or activities of the operators (SCHEMES II and IV)
Opexala are the updatable costs:


a
a
a
Opexala  COEE
 COws
  MTpa  ACpa  COaltri

p

a
a 2
medio , a  2
COEE
 min[COEE
; (COEE
* kWh a 2 ) *1,1] *
 1  I 
a
t
t  2013
a
2013
COws
 COws
a
a
a
a
a
COaltri
 COATO
 COAEEG
 COmor
 COres
FOLLOWED CRITERIA
• Coaltri are the «passing trough cost»
considered as exogenous ones,
13
COST COMPONENTS … ERC
[4] ENVIRONMENTAL AND RESOURCE
COSTS
FOLLOWED CRITERIA
• ERC clearly expressed as VRG component from 2015
ERCa  EnvCa  Re sC a
EnvCa are the environmental costs. They represent the costs of damage that water
uses impose on the environment and ecosystems and those who use the
environment (e.g. a reduction in the ecological quality of aquatic ecosystems
or the salinisation and degradation of productive soils):
a
a
EnvCa  EnvCend
 EnvCeso
Endogenous Environmental costs
Re sC a
Exogenous Environmental costs
are the resource costs. They represent the costs of foregone opportunities
which other uses suffer due to the depletion of the resource beyond its
natural rate of recharge or recovery (e.g. linked to the over-abstraction of
groundwater)
14
TARIFF REGULATION: REGULATORY SCHEMES
More activities
not a constraint,
but a way to
evaluate the
most appropriate
regulatory option
OPERATING COSTS

t 3
More
investments
INVESTMENTS
t
I Pt
exp
RABMTT

t 3
t
I Pt
 0,5
exp
RABMTT
 0,5
NO VARIATIONS IN THE OPERATOR’S
PRESENCE OF VARIATIONS IN THE
OBJECTIVES OR ACTIVITIES
OPERATOR’S OBJECTIVES OR ACTIVITIES
SCHEME I – ordinary case
 Opex: more push on operating
efficiency through a rolling cap,
assuming the invariance over the
period
 Capex recognised ex post using
technical lives
SCHEME II
 Opex: possibility to cover more opex
motivating the request (and taking in
consideration scale economies)
 Capex: same as ordinary case
SCHEME III
 Opex: same as ordinary case
 Capex: more accelerated
depreciation admitted, together
with (limited) anticipation on
investments
SCHEME IV
 Opex: possibility to cover more opex
motivating the request (and taking in
consideration scale economies)
 Capex: more accelerated
depreciation admitted, together with
(limited) anticipation on investments
Ordinary
case is
sufficient to
finance
investments
Ordinary
case not
sufficient to
finance
investments
15
TARIFF REGULATION: 4 REGULATORY SCHEMES (2)
 Tariffs applied in 2012 (calculated on the base of the old Method MTN) have to be updated
multiplying them by a factor 
 
a

VRG a  0,5 * Rba  2  Cba  2
 tarif u
2012
a 2

 (vscal u )T  Rba  2
Half margin from
competitive water activities
is used to reduce the tariffs
of monopoly water activities
u
 Maximum limit to the variation of the tariff multiplier, except for any specific inquiry in case the
limit needs to be passed in order to ensure that specific objectives are met
Cap to the variation of the tariff
multiplier
Schemes I e II
a
 (1  rpi  K )
 a 1
Schemes III e IV
a
 [1  rpi  (1   ) * K ]
 a 1
K= 5%
γ= 0,5
16
“Recent trends” in “water pricing”:
the Italian Case
Results after the Approval
(first stage of tariff control)
SOME PRELIMINARY OUTCOMES:
TARIFFS APPROVED BY AEEGSI
MTT (2012-13)
 AEEGSI approved tariffs for 1.816 operators concerning
42.132.900 inhabitants
 The new tariffs had an average yearly increase of 2.5% in 2013
 The remaining tariffs are under accounting enquiries by AEEGSI
MTI (2014-15)
 AEEGSI approved tariffs for 1.609 operators regarding 39.918.162
inhabitants.
 The new tariffs had an average yearly increase of 3.96% in 2014
and 4.82% in 2015
18
SOME PRELIMINARY OUTCOMES: INVESTMENT
 From the specific received by AEEGSI from Local Bodies, 90 operators whose
tariffs are already approved by AEEGSI (more than 33 mln inhabitants) plan to
invest around € 4.6 bln in the next 4 years
45
22.372.892
inhabitants
9.582.605
inhabitants
40
Operators (N.)
35
Planned Investments for Scheme
30
Scheme I
25
3%
Scheme II
Scheme III
20
27%
Scheme IV
15
10
615.977
inhabitants
650.510
inhabitants
5
66%
4%
0
Scheme I
Scheme II
Scheme III
Scheme IV
Scheme I
Scheme II
Scheme III
Scheme IV
19
Other activities
How AEEGSI is organizing information to support its decisions
DB geography of
operators
DB Technical
Data
DB Tariff components
DATA COLLECTION
DB User Tariff &
Consumption
DB Balance Data
DATA
WAREHOUSE
(DW)
Integrating data
from different
sources, DW
extracts,
transforms and
loads data into a
central repository
that could be
used for
reporting and
data analysis
REPORTING ACTIVITY
on:
- WATER SECTOR
STRUCTURE
[operators
geographical
mapping]
- STATE OF WATER
SERVICES [state of
infrastructures;
investments
requirement; water
consumption..]
- COSTS & TARIFFS
- INDUSTRIAL
OUTLOOK
DB Quality Data
21
PUBLIC CONSULTATIONS
Date
Object
22/05/2012
204/2012/R/idr: adoption of Transitional Tariff Method –framework
12/07/2012
290/2012/R/idr: adoption of Transitional Tariff Method – details of the method
02/08/2012
348/2012/R/idr: adoption of regulatory decisions on transparency and billing
31/10/2012
453/2012/R/com: facilities for populations hit by earthquake of 20 May 2012
28/02/2013
82/2013/R/com: accounting separation for water service operators
07/03/2013
97/2013/A: guidelines on measuring administrative costs of information obligations for regulated
entities
25/07/2013
339/2013/R/idr: investment needs and financial instruments to meet environmental quality and water
resource targets
01/08/2013
356/2013/R/idr: tariff decisions on 1° regulatory period (2012-2015) – new method
28/11/2013
550/2013/R/idr: tariff decisions on 1° regulatory period (2012-2015) – details of recognised costs
07/02/2014
36/2014/R/com: revision/simplification of accounting separation rules
27/03/2014
143/2014/R/idr: tariffs determinations for years 2010 and 2011
10/04/2014
171/2014/R/idr: management agreement models between contracting body and operator
19/06/2014
299/2014/R/idr: tariff definition for sewerage and treatment of industrial customers
19/06/2014
539/2014/R/idr: Environmental and Resource Costs (ERC) in MTI
To be published: second document on tariff definition for sewerage and treatment of industrial
customers
To be published: contractual quality
22
THANK YOU!
23